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The Trump Tax Reform's Pass-Through Boondoggle

"Trump's tax plan lies. Boon to top 1%."

It's a great deal for the Donald Trumps and Jerry Joneses of the world.

by Justin Fox

September 28, 2017, 11:18 PM GMT+10


Not the little guy. Photographer: Matthew Stockman/Getty Images

Here's an interesting passage from the "Unified Framework for Fixing Our Broken Tax Code" released Wednesday by the White House and Republican congressional leaders:

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The framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%. The framework contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
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These are what are called pass-through entities. Most are in fact small. But many aren't, and most of the income earned by pass-through entities goes to the big ones. Consider one partnership that's been in the news this week, the Dallas Cowboys Football Club Ltd., which has annual revenue of $840 million and an operating profit of $350 million, according to Forbes. Jerry Jones, the primary owner, has a net worth of $3.8 billion, according to the Bloomberg Billionaires Index -- which puts him about $100 million short of the global top 500 but does make him wealthier than 99.9999 percent of Americans (among them President Donald Trump, whose net worth Bloomberg puts at $2.9 billion). Overall, 69 percent of income from partnerships, which includes limited liability companies, and 66.9 percent of S corporation income goes to those in the top income percentile, the Treasury Department estimated in 2015. (The percentage for sole proprietorships was just 16.2 percent.)

More with links .. https://www.bloomberg.com/view/articles/2017-09-28/the-trump-tax-reform-s-pass-through-boondoggle

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9 facts about pass-through businesses

Aaron Krupkin and Adam Looney
Monday, May 15, 2017

The overwhelming majority of businesses in the U.S. are not C-corporations subject to the corporate tax. Rather, most businesses—about 95 percent—are “pass-throughs,” which have their income “pass through” to their owners to be taxed under the individual income tax.

Pass-through businesses include sole proprietorships, partnerships, and S-corporations. Because these businesses’ decisions are affected by both corporate and individual tax systems, earn a majority of U.S. business income, range in size and complexity, and operate economy-wide in a variety of industries, they represent unusual challenges to tax reform.

Both the Trump administration and the 2016 House Republican tax reform plan propose large reductions in taxes paid on business income, including taxes paid by owners of pass-through businesses. For instance, the Trump tax plan proposes reducing the corporate tax rate from 35 percent to 15 percent and the top tax rate on income earned from pass-through business from 39.6 percent to 15 percent.

Authors

Aaron Krupkin
Senior Research Analyst - Urban-Brookings Tax Policy Center

Adam Looney
Senior Fellow - Economic Studies, Urban-Brookings Tax Policy Center

To help understand the policy considerations surrounding the taxation of pass-through businesses and the implications of potential reforms, here are nine facts about pass-throughs and the current U.S. approach to taxing business.

Click on each fact to jump to its discussion.

1. Most businesses are pass-throughs.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact1
Of the 26 million businesses in 2014, 95 percent were pass-throughs, while only 5 percent were C-corporations.

2.Almost all businesses are small.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact2
In 2014, almost 99 percent of businesses, whether pass-through businesses or C-corporations, had $10 million or less in sales or receipts.

3. Pass-throughs are not necessarily small businesses.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact3
A small number of large businesses account for the majority of pass-through profits and economic activity.

4. Pass through businesses now earn a majority of business income.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact4
In the early 1980s, C-corporations produced almost all business income. In 2013,
only 44 percent of the income of business owners was earned through C-corporations.

5. Pass-through businesses pay lower tax rates than C-corporations.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact5
The gap between the lower tax rate on pass-throughs and the higher rates faced by C-corporations
creates a major incentive for businesses to un-incorporate and to organize as pass-throughs.

6. The multitude of business types encourages inefficient tax avoidance.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact6
With so many options to choose from when determining how to structure a business and whether to distribute business
income as profits, wages, or capital gains, business owners have considerable incentive and ability to avoid tax.

7. The growth of pass-through businesses has eroded corporate and payroll revenues.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact7
If the relative shares of pass-through and C-corporate activity were held at 1980 levels, the average tax rate
on business income in 2011 would have produced at least $100 billion in additional revenue in 2011 alone.

8. Pass-through income is primarily earned by high-income individuals.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact8
About 70 percent of partnership income accrues to the top 1 percent, compared to less than 50 percent of corporate dividends and 11 percent of wages.

9. Pass-through businesses are responsible for a significant share of the tax gap.
https://www.brookings.edu/research/9-facts-about-pass-through-businesses/#fact9
About 41 percent of the tax gap from 2008-2010, or $190 billion, was due to pass-throughs underreporting income and thus paying too little income tax.

https://www.brookings.edu/research/9-facts-about-pass-through-businesses/

"And Trump, "It's not good for me. Believe me". One of his most outrageous, and stupid, lies. Fearlessly-fictional he will always be."

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